[This is part of the series: The Complete Guide To Economics 101.]
What is interest rate crowding out?
Interest Rate Crowding Out is the decrease in private expenditures when government expenditures increase.
How does this work?
- The government finances some/much of its expenditures through selling bonds.
- To get others to purchase these bonds, the government must offer a better interest rate relative to the associated risk.
- This pushes up interest rates all over the economy.
- Higher interest rates lead to a higher cost of borrowing and less business growth and investment.
This is one of the reasons why fiscal policy does not work.